Over invoicing affecting local manufacturers


Local investors are claiming that over invoicing, which is not seen as a priority by the tax authority, is pressuring their activity. Sector experts accepted and said that the claim needs cooperation between revenue office, Customs Commission and financial institutions for a solution.
Investors who came up with their claim told Capital that the investment sector particularly foreign investors are engaged in over invoicing for their imports.
According to these investors, who demanded anonymity, the problem is mainly observed in capital goods and raw material imports that have a customs duty from zero to five percent.
Foreign investors are using this illegal act for different purposes, according to local investors, who are affected highly because of the illegal activity.
Initially in their capital goods import, foreign investors come up with exaggerated cost to get gaps at profit tax, dividend tax and misinform financial firms, according to experts.
“There are two revenue collection bodies, customs and revenue collection offices, who are not sharing information properly regarding this issue,” according one customs expert.
Fekadu Bekele, advisor of the Minister at Ministry of Revenue (MoR), shared the idea. He said that initially the over or under invoice is deliberately done to evade tax and to access huge amount of finance from banks.
“The customs is focusing only on under invoicing because the priority for it is the revenue collection. Due to that the two bodies are going separately and become unable to look the overall economic and revenue impacts for the country that occurred in relation with over invoicing,” he said.
“The two bodies should use each other’s information,” he added.
It is an actual problem that has been stated in different studies, according to experts.
The tax office and customs should look together the information and identify the over or under invoicing clearly to solve the problem and keep the benefit of the country first, they said.
There are post clearance audit by the Customs Commission, which is under MoR, and desk audit by tax office, the two bodies should exchange their information to get clear image and tackle tax evasion.
If the tax office get the information that the import of capital goods is over invoiced it will get a way to get the proper tax and revenue.
The customs have huge database that can easily identify whether the imported goods are over or under invoiced that will help to collect proper tax and duty, according to experts.
“The customs may focus on revenue earnings due to that it may not be concerned when high price or over invoicing come, but it will identify the over and under invoice that can be used by the domestic tax office,” they explained.
“The customs collection information is crucial for tax collection and vice versa due to that they have to give attention for it,” private company tax experts said.
They said that due to the revenue office is not sharing the information with Customs Commission and only give attention for maximizing the tax collection, local investors have become a victim.
“For the same capital goods foreign investors provide highly exaggerated invoice but meanwhile we come up with proper invoice that will not sound correct for the tax authority, that only give focus only on under invoice and will argue that our invoice is under the real price,” they said. “It has affected local investors, who are afraid the tax office might demand exaggerated taxes when it comes to desk audit,” they added.
But if the tax office and customs share their information frequently the problem will be solved and even the tax office can get proper revenue from those who come up with over invoiced documents, according to experts.
“Both offices are looking the situation under their sector interest and that should be changed,” Fekadu, who is an expert in the over and under invoicing at MoR, said.
Experts said that over invoiced capital goods that are mainly included under duty free scheme may not directly pay the customs duty, but when they started paying taxes after the holiday the depreciation is very high that is directly related with inflated costs, which narrowed the profit margin.
“When the profit margin narrowed, these companies may not pay tax or sometimes declare losses,” Fekadu said.
According to experts the implication is not only limited for government revenue but it is also related with banks. Banks are giving loans based on the invoice of capital goods that are over invoiced from the real value. In actual terms banks are approving high amount of money as a loan for the capital goods, which have small real value.
“It may affect the banking industry if the businesses are closed because the actual price of the collateral is very small,” experts said.
“We have seen investors come with old machines but accessed huge amount of money from banks that is not of real value with their assets, but they get the money only because they appear with over invoiced capital goods,” Daniel Getnet, Head of Dabe Investment Consulting and Conveyance PLC, a legal consultancy firm for businesses mainly for FDIs’, told Capital.
He said there are some companies who abuse the legal gaps in Ethiopia. “Mostly they are coming with phony documents for their capital goods and supply of raw material, to abuse the tax system and get false values for their investment,” Daniel said.
“On the other hand they are using two different suppliers one is their own, which is formed to issue over invoiced document, while they are buying the product from other suppliers,” he said how the illegal process is done.
He advised that the government should form a body that follows corporate standard responsibility to closely follow the foreign investment. “Meanwhile there are arguments regarding this, there are countries follow the prudency of foreign investments,” he said.
Experts also claimed that the dividend tax is also evaded since the profit is very limited because of artificially inflated costs.
On the other hand foreign investors are using the over invoicing for capital fleet than using the legal divided flow.
Experts said that officials change within short period at the ministry and that might be the reason to not to fully solve the gap.
Fekadu said that the case has been identified by the ministry and different research papers have been done. “We have given professional opinion about the issue for MoR, due to that anybody who has a concern that might be the chamber or sector associations, can come up with their claim to initiate the case,” Fekadu said.